i913 

THL  L55LNTIAL  AND  THL  UNESSENTIAL 

IN 

CURRENCY  LEGISLATION 


4) 


THL  PAGL  LLCTURL  DLLIVLRE.D  AT  YALL  UNIVERSITY 

MAY  1,  1913 

BY 

A.  PIATT  ANDREW 

FORMLR  ASSISTANT  SLCRLTARY  OF  THL  TREASURY 


Bigitized  by  the  Internet  Archive 

in  2007  with  funding  from 

Microsoft  Corporation 


(?l/Mmls;es^hti^tiMs$enO0andrri 


THL  L55LNTIAL  AND  THL  UNESSENTIAL 

IN 

CURRENCY  LEGISLATION 


0 


THL  PAGL  LECTURE  DLLIVLRLD  AT  YALL  UNIVLR5ITY 

MAY  1,  1913 

BY 

A.  PIATT  ANDREW 

FORMER  ASSISTANT  SECRLTARY  OF  THE  TREASURY 


•^ 


REPRINTED  FROM  THE  YALE  REVIEW  OF  JUNE  1913 


.e^r 


THE  ESSENTIAL  AND  THE  UNESSENTIAL 
IN  CURRENCY  LEGISLATION. 

The  improvement  of  our  banking:  and  currency  system 
can  never  be  a  popular  issue.  It  is  abstruse.  We  are  only 
intermittently  conscious  of  its  necessity.  It  makes  no  appeal 
to  the  emotions.  Whatever  advocacy  or  support  it  may  have 
must  come  not  from  the  many,  but  from  the  few,  not  from 
the  marching:  clubs  and  cheering:  throng's  which  g:ive  color 
and  excitement  to  political  campaig-ns,  but  from  the  quiet 
thinking:  men  who  are  moved  by  the  dry  white  light  of  reason. 

Complexity  of  the  Problem. 

Currency  questions  have  always  been  baffiingly  intricate 
and  difficult  to  grrasp  or  resolve.  They  are  in  the  field  of 
economics  what  metaphysical  questions  are  in  the  field  of 
philosophy.  They  have  to  do  with  matters  which  underlie 
and  are  implicit  in,  all  other  economic  questions.  William 
James  once  said  of  metaphysics  that  it  was  only  an  unusually 
obstinate  effort  to  think  clearly,  and  if  that  be  true,  those  who 
discuss  the  currency  oug:ht  above  all  thing:s,  to  be  well 
g-rounded  in  metaphysics.  Many  years  ag:o  the  Eng:lish 
economist  Jevons  remarked  that  a  kind  of  intellectual  vertig-o 
seemed  to  attack  most  persons  who  devoted  themselves 
to  this  subject,  and  the  Scotch  economist  Macleod  was 
accustomed  to  assert  that  more  people  had  gone  insane  over 
it  than  over  anything  else  except  religion  and  love.  How- 
ever that  may  be,  it  is  certain  that  when  the  improvement  of 
our  banking  and  currency  law  was  last  under  discussion  in 
Congress,  there  were  as  many  different  diagnoses  of  the  situ- 

[  5  ] 

261347. 


ation,  and  as  many  suggested  remedies  as  there  were  students 
of  the  subject.  Anyone  who  tried  to  follow  the  discussion, 
and  form  a  clear  conception  of  the  issues  involved  and  of  the 
wrongs  to  be  righted,  was  confronted  with  a  whirling  kaleido- 
scope through  which  at  every  moment  new  arrangements  of 
facts  were  presented  at  new  angles  according  to  new  theories 
and  with  new  interpretations.  It  is  not  strange  if  some  of 
those  who  had  to  face  such  complexities  went  mad.  We  have 
here  to  do  with  a  problem  which  requires  an  unusually 
obstinate  effort  on  the  part  of  thoroughly  balanced  and  well 
trained  minds. 

Intermittency  of  Problem. 

There  is  another  reason  why  the  achievement  of  abetter 
banking  and  currency  system  depends  for  support  upon  the 
more  intelligent  and  better  educated  members  of  the  com- 
munity. We  only  suffer  intermittently  from  the  weaknesses 
and  deficiencies  of  the  present  banking  system,  and  during 
the  intervening  periods  it  requires  the  exercise  of  memory 
and  foresight  to  appreciate  their  momentous  consequences. 
Ordinarily  we  are  but  vaguely  aware  of  the  role  played  by 
the  banking  and  currency  system  in  our  daily  life.  We  know 
of  course  that  it  ramifies  all  through  agriculture,  industry  and 
trade,  but  we  are  no  more  conscious  of  its  operation  than  we 
are  of  the  beating  of  our  hearts  or  of  the  circulation  of  our 
blood.  Only  when  some  unusual  strain  is  put  upon  it,  and 
it  fails  to  respond  ;  or  it  collapses,  and  the  whole  business  of 
the  country  withers  and  succumbs,  is  it  brought  home  to  us 
that  the  very  existence  of  every  kind  of  business  and  com- 
merce depends  upon  the  proper  working  of  our  banking  and 
currency  system,  and  that  in  this  country  the  system  is  sadly 
in  need  of  thorough  and  scientific  readjustment.     Even  after 

[  6  J 


the  most  distressing-  crises  have  occurred,  almost  as  soon  as 
normal  conditions  are  resumed,  the  recollection  of  the  suffer- 
ing- that  was  entailed  begins  to  weaken,  the  general  appreci- 
ation of  the  need  for  preventive  and  remedial  arrangements 
lapses,  and  interest  in  the  subject  on  the  part  of  most  people 
wanes.  Hope  springs  eternal  that  the  disasters  through 
which  the  country  has  just  passed  will  never  occur  again, 
and  hope  undisappointed  for  a  short  period,  begets  belief. 

A  Dispassionate  Issue. 

But,  for  still  another  reason  the  currency  question  is  apt 
never  to  become  a  popular  issue.  It  appeals  primarily  to  the 
intelligence  and  not  at  all  to  sympathies  or  sentiments  or 
feelings  of  locality,  party  or  class.  One  feels  intensely 
about  wrong  conditions  if  responsibility  for  them,  or  their 
consequences,  center  in  a  particular  locality  or  upon  a 
concrete  individual  or  group  of  people.  But  when  one  has 
to  do  with  conditions  to  which  no  personal  responsibility  can 
be  attached  and  the  effects  of  which  are  not  confined  to  any 
groups  or  classes  or  localities,  but  which  influence  people 
throughout  the  country  in  every  kind  of  business  or  profes- 
sion and  in  every  branch  of  labor,  one's  feelings  flag. 
One's  sympathies  with  those  affected  become  dilute.  There 
is  no  one  in  particular  to  be  sorry  for  or  to  envy  or  to  blame. 
And  proposals  for  remedy  or  improvement,  because  of  their 
ver}^  scope,  are  likely  to  lack  warm  popular  support.  Such 
enterprises,  whatever  their  pith  and  moment,  unless  they 
have  the  active  advocacy  of  men  of  trained  intelligence,  are 
sure  to  lose  the  name  of  action. 

Upon  all  of  these  accounts,  because  of  the  complexity  of 
the  problem,  because  of  the  intermittency  of  its  appearance, 
and  because  of  its  essentially  intellectual  appeal,  the  country 

[7] 


needs   particularly  the    cooperation  of    university  men  in 
achieving:  its  solution. 

Growing  Agreement  Upon  Essentials. 

The  outlook  for  currency  leg-islation  has  never  been  as 
favorable  as  it  is  today.  In  the  winter  following  the  great 
panic  of  1907  Cong:ress  and  the  country  weltered  in  a  chaos 
of  conflicting"  opinions  as  to  its  causes  and  as  to  the  appro- 
priate remedies.  There  was  little  time  during  the  Cong:res- 
sional  session  for  any  fresh  or  thorough  analyses  of  these 
matters .  Representatives  of  the  older  communities  harked 
back  to  the  discussions  that  had  followed  the  panic  of  1893 
thirteen  or  fourteen  years  before,  and  revamped  proposals 
which  were  current  then,  some  of  which  had  been  well 
enough  adapted  to  meet  conditions  at  that  time,  but  few  of 
which  were  pertinent  or  adequate  for  the  situation  in  1907. 
Representatives  of  the  newer  experimenting  states  (the  most 
conspicuous  of  which  lacked  earlier  experience  in  these 
matters,  having  scarcely  been  settled  by  white  men  at  the 
time  of  the  panic  of  1893)  without  waiting  for  any  careful 
diagnosis  of  the  ills  requiring  remedy,  proceeded  to  pre- 
scribe intuitively  out  of  their  inner  consciousness  remedies 
for  ills  which  had  never  really  existed.  If  permanent  cur- 
rency legislation  had  resulted  directly  from  the  discussions 
of  the  winter  of  1907-8  it  would  have  been  a  great  misfortune 
for  this  country.  We  should  have  had  laws  framed  either  to 
remedy  conditions  of  a  generation  before,  which  had  for  the 
most  part  ceased  to  exist,  or  laws  framed  to  remedy  evils 
which  never  had  had  any  substantial  existence  outside  of  the 
minds  of  the  legislators.  It  was  far  better  to  jack  the 
system  up  with  a  temporary  prop  and  then  dig  thoroughly 
down  to  bed  rock   for  the  permanent    foundations.      This 

[  8  ] 


Congress  did,  and  as  a  result  the  ground  has  now  been 
cleared.  Effects  have  been  traced  back  to  their  causes. 
The  essential  has  been  sifted  from  the  unessential,  and  out 
of  the  chaos  of  opinions  and  theories  that  prevailed  five  years 
ago  a  substantial  agreement  among  competent  authorities 
has  been  attained,  first,  as  to  what  most  needs  remedying-  and 
second,  as  to  the  g-eneral  character  of  the  remedies  required. 
There  remain  to  be  sure  sporadic  advocates  of  remedies  for 
evils  that  have  never,  or  not  for  a  long  time,  existed,  and  to 
these  we  shall  devote  attention  presently,  but  there  seems  to 
be  little  serious  disagfreement  as  to  what  are  the  primary 
issues  and  the  important  discussion  of  today  tends  rather  to 
center  around  their  details. 

This  remarkable  chang-e  is  the  result  of  five  years' 
deliberate  and  dispassionate  discussion  by  leaders  of  thought 
in  all  parts  of  the  country,  but  in  a  large  and  important  sense 
it  was  brought  about  by  the  wise,  persistent  and  broad- 
minded  impulse  g-iven  to  the  discussion  by  one  man.  What- 
ever name  the  final  act  may  chance  to  bear,  and  whatever 
its  details  and  terminology,  if  it  embodies  the  essential  pro- 
visions which  the  best  thought  of  the  country  today  has 
come  to  agree  that  such  legislation  requires,  it  will  be  largely 
due  to  the  guidance  and  impetus  given  to  the  discussion  by 
Nelson  W.  Aldrich,  former  senator  from  Rhode  Island. 

The  Unessential  Issues. 

I  have  said  that  the  defects  and  remedies  about  which 
discussion  ranged  during  the  months  immediately  following 
the  panic  of  1907  were  by  no  means  those  to  which  the  more 
deliberate  and  better  instructed  opinion  of  today  attaches 
major  importance.  Many  at  that  time  were  primarily  con- 
cerned with  the  insecurity  of  bank  deposits  and  the  possibil- 

[9] 


ity  of  insuring:  depositors  against  possible  loss.  Some  were 
still  inclined  to  attach  importance  to  the  risk  to  the  mone- 
tary standard  entailed  by  the  continued  retention  in  circula- 
tion of  the  greenbacks.  Many  dwelt  with  exclusive  empha- 
sis upon  the  inflexibility  of  the  banknote  circulation  and 
considered  a  reorganization  of  the  system  of  note  issue  as  the 
one  necessary  improvement  in  our  banking  arrangements. 
Today,  however,  there  are  not  many  who  have  given  serious 
study  to  the  subject  who  regard  either  the  insurance  of  bank 
deposits,  or  the  retirement  of  the  greenbacks,  or  even  the 
reorganization  of  the  note  issue  as  the  dominant  desideratum 
of  currency  reform. 

THE  DEPOSIT  GUARANTEE. 

The  deposit  guarantee  idea  has  occasional  advocates 
even  in  high  places  today  but  they  are  few  as  compared  with 
the  legions  who  rallied  around  its  standard  four  or  five  years 
ago.  Its  strange  eventful  history  teaches  memorable  lessons 
and  even  at  the  risk  of  taking  you  over  very  familiar  ground 
I  am  going  briefly  to  recall  it  to  you.  The  idea  was  born 
in  Oklahoma  in  the  very  throes  of  the  panic  of  1907, 
after  the  shortest  possible  period  of  gestation.  The  panic,  it 
will  be  remembered,  began  October  28,  1907,  and  it  was  not 
until  three  weeks  later,  on  November  16,  that  Oklahoma 
became  a  state,  and  its  first  legislature  began  its  sessions. 
Nevertheless  the  panic  was  not  yet  over,  currency  was  still  at  a 
premium  and  clearing  house  certificates  were  still  outstanding 
throughout  the  country  when  the  Oklahoma  legislature  passed 
its  famous  law.  This  first  legislature  of  a  new  state  had  been 
in  session  only  four  weeks,  when  on  December  17,  it  adopted 
with  scarcely  any  debate  a  law  without  any  precedent  in  any 
other  country,  and  with  only  one  dimly  remembered  unsuccess- 

C  10] 


ful  precedent  in  the  United  States,  a  law  which  notwith- 
standing- presented  what  was  probably  the  most  far  reaching 
and  drastic  experiment  in  banking"  legfislation  that  had  been 
made  anywhere  in  the  world  for  at  least  two  g-enerations .  The 
only  real  precedent  for  it  was  the  early  safety  fund  system 
tried  in  New  York  state  between  1829  and  1842,  which  had 
ended  in  a  g-eneral  banking:  collapse,  and  had  been  discarded 
sixty-five  years  before.  The  old  State  Bank  of  Indiana  with 
its  thirteen  branches  mutually  liable  for  each  others'  debts 
has  sometimes  also  been  cited  as  a  precedent,  but  the  com- 
parison is  not  valid  as  the  branches  of  the  Indiana  bank  were 
branches  of  a  central  bank,  and  althougfh  they  had  separate 
capital  and  assets,  they  were  not  independent  institutions, 
but  were  indissolubly  bound  together  under  the  joint  respon- 
sibility and  control  of  the  officers  of  the  parent  bank. 

Yet,  singularly  enough  (and  this  shows  the  possibilities 
of  hasty  legislation  even  under  representative  government) 
this  unique  and  virtually  unprecedented  experiment  of  the 
newest  of  the  states,  although  it  had  been  adopted  without 
deliberate  or  thorough  discussion,  and  although  it  had  not 
yet  been  tested,  was  promptly  espoused  by  the  legislatures 
of  several  neighboring  states.  Nothing  of  course  could  be 
more  popular  with  constituents  than  the  freedom  which 
it  ensured  to  them  to  "bank"  with  whatever  institution 
offered  the  largest  inducements,  without  having  to  worry 
about  possible  loss.  It  was  almost  as  if  the  government 
were  to  say  '  *  invest  your  money  where  you  can  get  the 
highest  dividends  and  in  case  of  failure  we  will  oblige  the 
more  conservative  low-dividend-payers  to  reimburse  you." 
And  so  with  variations  of  detail  a  *  *  compulsory'  *  deposit 
guarantee  was  adopted  in  Nebraska  and  in  Texas  and 
a  **  voluntary"  guarantee  in  Kansas  and  South  Dakota,  and 

[  11  3 


the  Democratic  party  in  its  national  platform  in  1908  advo- 
cated the  establishment  of  a  gruarantee  in  compulsory  form 
for  the  national  banks.  It  may  seem  incredible  that  such 
an  idea  should  have  attained  such  momentum  in  so  short 
a  period,  but  the  facts  are  that  in  the  legfislatures  of  several 
other  states  it  was  under  discussion  in  1909  and  that  it  would 
probably  have  been  adopted  in  some  of  them,  had  not  the 
day  of  reckoning-  begun  in  Oklahoma  on  September  29th 
of  that  year. 

Failure  of  the  Guarantee  in  Oklahoma. 

On  that  date  the  bank  with  the  largest  deposits  in  the 
state,  the  Columbia  Bank  and  Trust  Company  of  Oklahoma 
City,  closed  its  doors  owing  its  customers  almost  $3,000,000. 
The  possibilities  of  the  guarantee  law  as  a  stimulus  to  hot- 
house methods  of  banking  were  well  shown  in  this  instance, 
for  under  its  fostering  security  this  bank  had  succeeded  dur- 
ing a  single  year  preceding  in  increasing  its  deposits  from 
$365,000  to  $2,901,000.,  or  by  more  than  694  per  cent.  The 
possibilities  of  the  law  as  a  source  of  expense  to  sound  banks 
was  also  shown  in  the  losses  charged  to  the  guarantee  fund 
on  account  of  this  and  the  other  failures  that  followed  it 
which  during  the  succeeding  four  years  amounted  to  more 
than  two  million  dollars.  In  other  words,  during  this  brief 
period  the  solvent  banks  of  the  state  were  assessed  and  made 
to  pay  an  amount  equal  to  more  than  twenty  per  cent,  of  their 
capital,  or  an  average  of  about  five  per  cent,  per  year,  in 
order  to  make  good  the  debts  of  unsound  institutions  for 
whose  mismanagement  they  were  not  even  remotely  respon- 
sible. One  solvent  bank  in  particular  has  been  cited  as  hav- 
ing been  obliged  to  turn  over  no  less  than  34  per  cent,  of  its 
capital  during  these  four  years  in  order  to  reimburse  the 

C  12  ] 


depositors  of  other  institutions.  In  view  of  this  situation  it 
is  not  surprising:  to  learn  from  the  Secretary  of  the  Oklahoma 
Bankers  Association  that  200  of  the  Oklahoma  banks  have 
not  earned  a  dividend  in  the  last  three  years.  Nor  need  one 
be  surprised  to  learn  from  the  Comptroller  of  the  Currency 
that  while  during  the  years  1908-9, — the  first  of  the  Oklahoma 
experiment, —  82  national  banks  in  that  state  left  the  federal 
system  to  become  state  institutions,  and  secure  the  supposed 
benefits  of  the  state  bank  gfuarantee,  during:  the  years  1911-2, 
— after  three  or  four  years  of  distressing-  and  costly  experience 
with  it, — no  less  than  88  state  institutions  reorganized  under 
federal  charters  in  order  to  escape  its  known  hardships.  This 
means  of  escape  would  probably  have  been  still  more  exten- 
sively resorted  to  were  it  not  for  the  fact  that  the  majority  of 
the  Oklahoma  state  banks  have  not  sufficient  capital  to  meet 
the  requirements  of  the  federal  law. 

With  the  collapse  of  the  Oklahoma  system  the  general 
agitation  for  the  adoption  of  deposit  guarantee  legislation  in 
other  states  and  by  the  federal  government  also  collapsed. 
The  flood  of  political  oratory  in  its  behalf  subsided  as  quickly 
as  it  had  risen,  and  in  1912  even  the  political  platform  writers 
whose  word  ranks  only  second  in  authority  to  Holy  Writ  and 
the  Constitution,  forgetting  their  solemn  demands  of  1908, 
omitted  all  reference  to  it  from  their  sacro-sanct  deliverances. 
The  only  remaining  supporters  of  such  legislation  today  are 
apparently  its  originators  in  the  Southwestern  states  who  not 
unnaturally  defend  it. 

Fallacy  of  the  Guarantee  Idea. 

Looked  at  in  the  abstract  such  legislation  never  had  any 

real  reason  for  existence.     It  was   an  unwise   and  unjust 

remedy  ' '  for  an  imaginary  evil.     It  was  unwise  because  of 

[  13  ] 


its  inevitable  tendency  to  lessen  responsibility  in  bank  man- 
agement, its  weakening:  of  the  incentives  for  prudence  whether 
in  fixing:  interest  rates,  in  g-ranting-  accommodation,  in  declar- 
ing: dividends  or  in  building  up  a  surplus,  or  in  any  of  the 
other  matters  that  enter  into  the  conduct  of  a  bank.  It  was 
unjust  because  it  taxed  well  managed  institutions  for  the 
consequences  o»f  bad  judgment,  imprudence  or  dishonesty  in 
the  conduct  of  other  institutions,  for  which  they  were  in  no 
way  responsible,  and  which  however  aware  they  might  be  of 
their  existence,  they  had  no  means  whatever  to  prevent. 
It  was  certainly  unfair  to  stockholders  in  carefully  managed 
banks  to  oblige  them  to  protect  persons  who  did  not  do  busi- 
ness with  them,  but  had  preferred  banks  of  less  conservative 
policy.  But  above  all  the  deposit  guarantee  legislation  was 
uncalled  for.  The  losses  entailed  upon  depositors  because  of 
bank  failures  are  not  of  sufficient  proportions  to  demand  so 
drastic  a  remedy.  In  the  national  banks  during  the  more  than 
half  century  in  which  the  federal  system  has  existed,  accord- 
ing to  the  Comptroller  of  the  Currency,  these  losses  have 
amounted  on  the  average  to  only  about  3-100  of  1  per  cent, 
of  the  aggregate  deposits,  and  there  is  no  evidence  to  show 
that  the  losses  have  been  any  greater  in  the  state  chartered 
institutions,  except  in  those  states  in  which  the  deposit  guar- 
antee has  been  operating. 

It  is  not  altogether  clear  just  what  was  aimed  at  by  the 
deposit  guarantee  agitators,  but  in  all  likelihood  the  objects 
sought,  in  so  far  as  they  were  reasonable  and  legitimate, 
could  have  been  more  easily  and  adequately  and  less  danger- 
ously attained  by  other  means.  If  what  was  desired  was  to 
utilize  the  service  and  security  of  the  government  in  hand- 
ling the  savings  of  people  who  are  distrustful  of  banks,  and 
so  to  reduce  the  hoarding  of  actual  cash,  this  object  has  been 

[  14  ] 


far  more  satisfactorily  attained  by  the  establishment  of  the 
postal  savings  system  and  the  issue  of  postal  savingfs  bonds 
in  small  denominations.  If,  however,  what  was  desired  was 
to  make  it  possible  for  a  bank  at  its  discretion  to  ensure  its 
depositors  against  loss  in  case  of  insolvency,  which  would 
seem  to  have  been  the  object  in  the  states  where  the  * '  volun- 
tary ' '  system  was  adopted,  this  could  have  been  accomplished, 
as  the  decisions  of  the  Supreme  Court  have  shown,  without 
further  legislation  through  the  agency  of  private  insurance 
firms.  But  if  what  was  desired  was  to  ensure  to  depositors 
in  thoroughly  solvent  banks  the  immediate  availability  of 
their  deposits  at  all  times,  this  end  would  be  best  accomplish- 
ed not  by  making  the  assets  of  such  banks  liable  for  the  debts 
of  insolvent  institutions,  but  by  adding  to  our  present  bank- 
ing system  such  facilities  as  would  ensure  to  solvent  banks 
the  possibility  of  always  translating  their  sound  assets  imme- 
diately and  without  limit  into  available  funds.  This  we 
shall  see  is  the  fundamental  desideratum  of  our  currency 
system. 

THE  RETIREMENT  OF  THE  GREENBACKS. 

And  now  by  way  of  clearing  the  ground  further  of  the 
unessential,  let  us  turn  abruptly  to  another  quite  different 
corner  of  the  currency  field.  Let  us  consider  for  a  moment 
an  issue  which  twenty  years  ago  was  urgently  pertinent,  was 
in  fact  the  very  crux  of  so  called  "  currency  reform,"  and 
which  still  persists  as  a  live  issue  in  the  minds  of  some  of 
the  veteran  "  reformers  "  of  those  days,  although  the  condi- 
tions which  then  gave  it  point  have  long  since  disappeared. 
We  must  pause  to  consider  the  retirement  of  the  greenbacks, 
not  because  the  question  is  of  itself  of  importance  but  because 
it  is   most  important  to  distinguish    clearly  between    the 

C  15  ] 


essential  and  the  unessential,  and  not  to  encumber  the 
attempt  to  secure  constructive  currency  legislation  with 
proposals  which  are  not  vital  and  which  might  arouse  unnec- 
essary friction. 

In  the  middle  nineties  when  it  was  estimated  that  the 
total  g-old  stock  of  the  entire  country  was  only  about  600 
million  dollars  and  less  than  200  millions  of  this  was  in  the 
vaults  of  the  Treasury,  the  government's  fiduciary  currency, 
consisting  of  346  millions  of  greenbacks  and  400  millions  or 
more  of  over-valued  silver,  presented  beyond  question  a 
serious  menace  to  the  country's  monetary  standard.  It 
meant  that  the  Treasury  had  outstanding  currency  obligations 
payable  in  gold  to  the  extent  of  three  or  four  times  its  own 
gold  holdings,  and  amounting  to  far  more  than  all  of  the  gold 
in  the  country,  including  the  holdings  of  the  Treasury,  the 
banks  and  the  general  public.  At  that  time  fluctuations  in 
the  trade  balance  of  a  single  year  sometimes  almost  equalled 
the  Treasury's  gold  holdings  in  amount,  and  it  was  quite 
conceivable,  in  fact  not  improbable,  that  a  sudden  unfavor- 
able change  in  that  balance  might  drain  the  Treasury  of  all 
of  its  gold,  and  leave  the  country  with  a  currency  standard 
of  depreciated  silver  or  paper.  This  was  the  situation  which 
continually  menaced  Mr.  Cleveland's  second  administration, 
causing  great  financial  anxiety  and  forcing  the  Treasury  dur- 
ing those  years  of  peace  and  normal  expenditures  to  borrow 
262  million  dollars  in  gold  in  order  to  replenish  its  continually 
dwindling  reserve.  Such  a  situation  inevitably  led  the  advo- 
cates of  monetary  legislation  in  the  nineties  to  place  first  and 
foremost  among  their  proposals  the  necessity  of  getting  rid 
of  the  precarious  greenback,  and  most  of  the  plans  proposed 
by  bankers'  associations,  chambers  of  commerce  and  financial 

[  16] 


experts  generally  at  that  time  emphasized  the  urgency  of 
this  measure. 

Why  Retirement  is  not  Important. 

It  sometimes  happens  that  with  the  lapse  of  time  and 
with  chang-ed  conditions,  infirmities,  long  left  untreated,  cure 
themselves,  and  so  it  has  been  with  the  one-time  bothersome 
greenback.  Twenty  years  ago,  when  the  outstanding  green- 
backs amounted  to  twice  the  gold  holdings  of  the  Treasury 
and  to  much  more  than  half  of  the  country's  entire  gold 
stock,  there  was  abundant  reason  for  anxiety  on  account  of 
their  continued  circulation.  The  situation  is  utterly  differ- 
ent today.  Gold  has  accumulated  in  the  Treasury  beyond 
the  wildest  "  dreams  of  avarice  "  of  the  nineties.  From  less 
than  200  millions  in  the  middle  nineties  the  Treasury's  gold 
holdings  have  grown  to  approximately  1250  millions  today, 
and  the  estimated  gold  stock  of  the  country  has  increased 
from  600  to  more  than  1800  millions,  (  despite  the  fact  that  the 
Director  of  the  Mint  in  1907  reduced  the  estimate  for  gold  in 
circulation  by  135  millions  as  compared  with  the  basis  of 
previous  years.) 

The  greenback  has  thus  become  each  year  a  relatively 
less  important  element  in  our  currency  system,  an  element 
of  ever  less  and  less  potency  for  harm.  Doubtless  the 
absolute  amount  of  outstanding  greenbacks  has  diminished 
considerably  through  loss  and  destruction  during  fifty  years, 
and  is  today  far  less  than  the  $346,000,000  issued  during  the 
Civil  War  which  are  still  carried  as  an  obligation  on  the 
government  books.  Yet  taking  the  greenbacks  at  the  full 
total  of  their  original  and  unre tired  issue,  they  now  fall  short 
by  900  millions  of  the  Treasury's  holdings  of  gold,  while 
in  1894  and  1895  they  exceeded  those  holdings  by  fully  200 

[  17  ] 


millions.  With  such  an  accumulation  of  reserves  it  is  incredi- 
ble that  the  Treasury  should  ever  agfain  experience  the  perils 
of  the  nineties  on  account  of  the  g^reenbacks. 

The  grreenbacks  are  less  menacing:  today  for  the  further 
reason  that  they  are  being-  rapidly  transformed  into  small 
denominations  which  are  absorbed  in  the  g-eneral  circulation, 
and  which  could  only  with  gfreat  difficulty  be  collected  in 
sufficiently  larg-e  amounts  to  cause  a  serious  drain  upon  the 
Treasury  throug-h  presentation  for  redemption.  Of  the  489 
millions  of  silver  certificates  at  present  in  circulation  all  but 
about  5  per  cent,  are  now  in  denominations  of  one,  two  and 
five  dollars,  and  of  the  346  millions  of  reported  greenbacks 
more  than  half  are  in  similar  denominations.  So  great  and 
continuous  is  the  demand  for  notes  of  small  denominations 
that  one  may  safely  predict  that  in  another  decade  practically 
all  of  the  greenbacks  still  in  existence  will  be  in  small 
denominations  in  the  pockets  of  the  people. 

The  **  endless  chain  "  with  its  ineffectual  bond  issues, 
the  imminence  of  specie  suspension,  and  the  fear  of  Treasury 
bankruptcy  will  never  ag:ain  result  from  the  outstanding: 
g:reenbacks.  Their  dangers,  lurid  and  nerve-racking  though 
they  were  twenty  years  ago,  are  now  only  memories.  They 
require  no  present  remedy  and  demand  no  consideration  in 
the  currency  legislation  of  today. 

DIMINISHING  IMPORTANCE  OF  BANK  NOTES. 

Few  probably  realize  the  change  that  has  come  over  bank- 
ing discussion  during  the  last  four  years.  Up  to  as  recent  a 
date  as  1909  when  any  economist  or  banker  of  the  Eastern 
states  spoke  of  banking  reform  (especially  as  distinguished 
from  monetary  reform)  it  was  reasonably  safe  to  assume  that 
what  was  primarily,  and  in  all  likelihood  exclusively,  referred 

[  18] 


to,  was  some  project  for  reorg-anizing-  the  methods  of  note 
issue.  Such  books  as  we  had  upon  banking  (and  there  were 
some  monumental  works  like  the  four  volume  * '  History  of 
Banking:"  published  in  1896  by  the  Journal  of  Commerce) 
dealt  only  with  the  history  of  note  issue  and  the  legfislation 
and  practices  connected  with  it.  The  plans  for  banking  legf- 
islation that  were  widely  discussed,  such  as  the  plan  of  the 
American  Bankers'  Association  adopted  at  their  convention 
in  Baltimore  in  1894,  and  thereafter  known  as  **  the  Baltimore 
plan  " ,  or  *  *  the  Carlisle  plan  ' ' ,  proposed  in  the  same  year  by 
Cleveland's  Secretary  of  the  Treasury,  or  even  the  imposingly 
and  energetically  propagandized  plan  of  the  Indianapolis 
Monetary  Commission  of  1898,  suggested  no  substantial 
changes  in  our  banking  laws  beyond  a  revision  of  the  arrange- 
ments for  note  issue.  Individuals  here  and  there  tried  to  call 
attention  to  other  defects  and  suggested  means  for  their 
remedy,  but  they  were  only  isolated  voices  crying  in  an 
unresponding  wilderness.  The  discussing  public,  whether 
of  academic  or  *'  practical  "  or  legislative  affiliations,  uncon- 
sciously continued  to  debate  banking  questions  from  virtually 
the  same  point  of  view,  and  in  almost  the  same  language  as 
the  English  authorities  who  debated  banking  reform  in 
England  during  the  decades  before  the  passage  of  Peel's  great 
act  of  1844.  They  could  not  seem  to  realize  that  banking  had 
become  vastly  transformed  during  the  last  fifty  years,  and 
that  while  it  was  formerly  true  that  a  community's  demands 
for  credit  were  met  in  nine  cases  out  of  ten  by  the  issue  of 
notes,  now  such  demands  are  met  in  nine  cases  out  of  ten  by 
ledger  balances,  or  what  in  ordinary  langfuage  are  miscalled 
deposits  ' ' .  Not  realizing  this,  they  could  not  perceive  that 
changed  banking  conditions  had  raised  other  problems  and 

[19] 


made  other  remedies  requisite  than  those  pertinent  to  bank- 
ing: a  half  century  or  so  ago. 

Present  Importance  of  Deposits. 

It  was  not  in  fact  until  within  the  last  three  or  four  years, 
when  the  investigations  and  reports  of  the  National  Monetary 
Commission  had  disseminated  a  fresh  "and  thorough  analysis 
of  banking-  as  it  is  currently  conducted,  that  discussion  cut 
loose  from  the  traditional  lines  upon  which  it  had  run  for 
generations  and  took  a  new  start.  Then  at  last  it  began  to 
be  generally  understood  that  in  order  to  render  our  banking 
system  properly  effective,  not  only  is  legislation  required 
which  will  make  the  issue  and  withdrawal  of  notes  correspond 
more  closely  with  the  fluctuating  needs  of  business,  but  per- 
haps even  more  urgently  legislation  is  required  which  will 
render  credit  more  freely  and  closely  responsive  in  the  form 
of  ledger  balances  or  deposits,  inasmuch  as  these  bulk  so 
much  larger  than  note  issues  in  the  country's  credit  machinery 
and  in  the  conduct  of  business  today.  This  was  one  great 
contribution  of  the  National  Monetary  Commission .  It  estab- 
lished the  idea  that  it  is  credit,  not  merely  in  the  form  of  note 
circulation,  but  prUnarily  in  the  form  of  deposits  that  must  be 
viade  flexible  and  responsive.  The  Commission  did  not  discover 
this  fact.  The  situation  had  existed  for  decades  and  many 
individuals  had  recognized  it,  but  they  emphasized  it  in  their 
reports,  and  provided  especially  for  it  in  their  bill  and  focussed 
the  general  attention  upon  it,  as  it  had  not  been  focussed 
before.  And  whereas  hitherto  there  had  been  a  few  who 
understood  it,  now  one  may  say  that  it  has  become  almost 
axiomatic  with  the  general  public,  including  apparently  our 
representatives  in  Congress. 

[  20  ] 


THE  REAL  TROUBLE. 

A  physician  would  probably  say  that  what  primarily  ails 
our  currency  system  and  causes  panics  and  desperate  strin- 
gencies is  something  akin  to  arteriosclerosis.  The  veins  and 
arteries  of  credit  which,  in  order  to  function  properly  ought 
to  be  elastic  and  contractile  like  rubber,  are  hard  and  brittle 
as  glass.  When  subjected  to  unusual  strain  they  can  yield 
but  little  and  are  very  liable  to  rupture,  and  when  once 
stretched  they  are  apt  to  remain  over  enlarged. 

Inflexibility  of  the  Notes. 

In  the  case  of  the  notes  the  cause  of  this  inflexibility 
is  too  well  known  to  require  specific  statement.  I  am  not 
one  of  those  who  undervalue  the  vast  service  rendered  to  this 
country  by  the  national  bank  notes.  Their  creation  marked 
the  greatest  forward  step  made  during  the  nineteenth  century 
in  this  country's  banking  legislation.  They  brought  order 
out  of  utter  chaos  in  our  bank  currency  and  the  assertion  of 
Judge  Alphonso  Taft  in  a  letter  to  Secretary  Chase  that  * '  if 
the  Civil  War  resulted  in  nothing  else  than  providing  the 
country  with  a  uniform  currency  it  would  not  have  been 
fought  in  vain  ' '  was  not  a  very  great  exaggeration  of  the 
truth.  They  have  been  of  uniform  value  throughout  the 
country  and  as  secure  as  the  government  itself  from  the  date 
of  their  institution  to  the  present  hour.  This  however  does 
not  alter  the  fact  that  the  terms  of  their  issue,  which  were 
influenced  by  the  financial  exigencies  of  the  government  dur- 
ing the  war,  do  not  allow  the  notes  to  respond  in  amount  in 
the  slightest  degree  to  the  changing  activity  and  needs  of 
business.  It  would  be  incredible  if  it  were  not  true,  that 
fifty  years  after  the  war  these  notes  should  still  be  made  to 
serve  as  an  artificial  market  for  government  bonds,    when 

[  21  ] 


the  cost  to  the  country  is  the  continual  inability  of  the  system 
to  respond  to  crop-moving:  and  other  seasonal  demands, 
and  a  continual  risk  of  general  business  collapse.  The  tem- 
porary act  of  May  30,  1908,  which  relaxed  the  rigor  of  the 
law  in  moments  of  critical  emergency  by  permitting  additions 
to  the  currency  to  be  based  upon  other  security  by  payment 
of  a  heavy  and  increasing  tax,  was  no  real  solution  of  the 
situation.  It  contained  no  provision  to  render  the  currency 
responsive  to  ordinary  fluctuations  in  currency  demand,  and 
resort  to  its  provisions  in  times  of  great  stress  might  easily 
precipitate  a  panic  if  one  did  not  already  exist.  It  was  only 
enacted  for  six  years,  and  was  only  regarded  by  its  sponsors 
as  a  temporary  palliative  pending  the  preparation  of  a  per- 
manent cure.  0?ie  universally  recognized  essential  then  of  a. 
proper  banking  and  cur7'ency  plan  is  provision  ^or  a  more 
flexible  and  responsive  note  issue. 

Inflexibility  of  Ledger  Balances. 

When  we  turn  to  credit  in  the  form  of  ledger  balances 
or  '  *  deposits  ' '  and  enquire  as  to  the  causes  of  their  inflex- 
ibility, the  explanation  also  rests  in  quite  familiar  facts. 
There  are  two  peculiar  features  of  our  banking  system  which 
are  practically  without  counterpart  in  other  important  countries 
and  which  render  ledger  balances  or  deposit  credits  in 
this  country  less  flexible  and  responsive  than  such  balances  or 
credits  are  elsewhere.  The  first  is  the  rigidity  of  our  reserve 
laws,  and  the  second  i^  the  lack  of  any  bankers'  bank  or 
similar  institution  with  ample  resources  and  lending  power, 
from  which  the  banks  can  replenish  their  own  reserves  when 
necessary. 


[  22  ] 


Rigid  Reserve  Requirements. 

Outside  of  the  United  States  I  know  of  only  one  other 
country  in  which  the  law  requires  a  cash  reserve  to  be  held 
against  deposits.  That  country  is  Holland,  and  the  law 
applies  to  only  one  institution,  the  Bank  of  the  Netherlands, 
and  that  institution  does  not  hold  enough  deposits  to  make  it 
worth  mentioning-  in  this  connection  (less  than  $3,000,000). 
Our  national  banking  law,  however,  and  the  banking  laws  of 
most  of  the  states  are  unreasonably  and  unsoundly  rigorous 
in  this  regard.  Not  only  must  stated  proportions  of  all 
deposits  be  held  by  the  banks  in  reserve,  but  these  reserves, 
according  to  the  law,  can  never  under  any  circumstances  be 
used.  It  is  very  much  as  if  the  government,  having  estab- 
lished naval  and  military  reserve  forces  in  time  of  peace  were 
to  insist  that  these  forces  not  be  used  in  time  of  war  in  order 
to  maintain  them  intact  as  reserves.  Whenever  the  cash  held 
by  a  bank  has  fallen  to  the  required  minimum,  the  bank  can 
not  legally  continue  to  extend  accommodation.  It  cannot 
issue  more  notes  unless  it  has  additional  government  bonds 
to  deposit  for  their  security,  and  it  cannot  enlarge  its  ledger 
balances  unless  it  has  additional  reserves.  No  matter  what 
may  be  the  stress  of  an  emergency,  or  whether  it  is  due  to  war, 
catastrophe,  or  unreasoning  fear,  there  are  no  legal  means 
for  relaxing  this  requirement.  And  so  in  moments  of  great 
sensitiveness  and  anxiety,  legal  spokes  are  apt  to  be  suddenly 
thrust  into  the  wheels  of  credit,  and  the  whole  machinery  of 
business  brought  crunching  to  a  standstill.  A  second  essential 
then  of  any  adequate  currency  plan  is  some  provision  which  will 
render  the  reserve  requireme^its  pliable  and  the  reserves  of  possible 
use. 


[  23] 


Need  of  Bankers'  Bank. 

Our  banks  also  have  less  flexibility  in  their  power  to 
lend  ledgfer  balances  than  the  banks  of  practically  all  other 
countries  for  another  reason,  because  of  the  lack  of  any 
permanent  institution  or  institutions  which  can  perform  for 
them  services  similar  to  those  which  they  perform  for  their 
customers.  An  individual  bank  makes  the  money  of  each  and 
all  of  its  customers  flexible  in  amount,  by  rendering-  it  of  mutual 
service,  and  available  to  those  who  most  need  it  when  they 
most  need  it,  and  in  order  that  the  money  of  individual  banks 
may  be  similarly  flexible  in  amount,  of  mutual  service  to 
each  other  and  available  to  those  institutions  which  most  need 
it,  when  they  most  need  it,  they  require  in  their  turn  some 
agfency  which  will  do  for  them  severally  and  jointly  what 
they  do  for  the  gfeneral  public. 

As  this  is  the  very  crux  of  the  whole  currency  problem, 
we  must  examine  a  little  more  closely  what  an  individual 
bank  is  and  does.  A  bank  is  (l)  first  of  all  an  intermediary 
between  borrowers  and  lenders.  It  collects  the  surplus 
money  of  those  who  do  not  intend  to  use  it  themselves  and 
lends  it  to  those  who  do.  But  (2)  more  than  this,  a 
bank,  by  pooling:  the  active  accounts  of  a  community, 
inasmuch  as  only  a  fraction  of  those  accounts  will  be  wanted 
at  the  same  time,  accumulates  an  additional  reserve  of  lend- 
ing power.  And  (3)  this  new  lending:  power,  which  it  has 
so  to  speak  created,  it  can  also  place  at  the  disposal  of  its 
customers,  discounting:  their  paper  or  bills  receivable, 
g-iving-  them  its  better  known  credit  for  their  own  which  is 
less  known,  and  making-  funds  immediately  available  for  them 
in  place  of  their  own  unmatured  obligations.  Now  banks 
need  for  their  own  self  protection  and  for  their  mutual 
assistance  and  above  all  in  order  to  serve   the   public   freely 

[  24  ] 


and  effectively,  some  ag-ency  which  will  perform  identical 
functions  in  relation  to  themselves.  It  does  not  matter  what 
such  an  ag-ency  may  be  called.  It  may  be  a  discount  bureau, 
or  a  rediscount  bureau,  a  national  clearing:  house,  or  a 
national  or  reg^ional  reserve  association.  Out  of  deference 
to  those  g-reat  financial  experts  who  write  the  banking:  clauses 
of  political  platforms  and  whose  bans  and  edicts  are  blessed 
with  sacerdotal  infallibility,  when  such  an  institution  is  pro- 
posed for  this  country,  it  must  not  be  called  a  central  bank. 
Such  an  institution  is  perhaps  most  plainly  designated  if  it 
is  called  a  "bankers'  bank",  but  by  whatever  name  it  is 
referred  to,  the  need  of  such  an  institution  is  the  fact  of 
primary  importance  in  the  American  banking-  situation. 

Functions  of  Bankers'  Bank. 

Just  as  an  individual  bank  economizes  and  mobilizes  and 
makes  flexible  in  amount  the  funds  of  individual  members  of 
a  community  so  a  bankers'  bank  mobilizes  and  economizes 
and  makes  flexible  in  amount  the  money  of  the  banks.  It 
collects  money  from  institutions  and  localities  when  and  where 
they  do  not  need  it,  and  lends  it  to  others  when  and  where 
they  do.  In  like  manner  the  active  deposits  of  the  various 
banks,  as  they  are  not  all  wanted  simultaneously,  furnish  the 
bankers'  banks  with  a  larg:e  surplus  reserve  of  lending  power, 
which  in  turn  is  an  invaluable  source  of  flexibility  to  the 
individual  banks.  By  its  means  they  can,  if  need  be,  redis- 
count their  commercial  paper,  exchange  their  unmatured 
assets  for  actual  cash,  and  secure  its  still  better  known  credit 
in  place  of  their  own.  By  its  means  their  reserves  can  be 
replenished  and  their  lending-  power  made  responsive  to  the 
needs  of  their  communities.  A  bankers'  bank  makes  it  pos- 
sible for  the  money  of  the  individual  banks  to  do  many  times 

[  25  ] 


the  work  it  would  do  if  left  in  the  separate  institutions,  and 
to  do  it  far  more  effectively.  It  is  the  only  ultimate  safe- 
guard, the  only  scientific  deposit  g-uarantee,  the  only  sound 
basis  of  flexibility  in  any  banking  system.  As  some  philos- 
opher once  said  of  God, —  if  such  an  institution  did  not 
already  exist,  people  would  certainly  have  to  invent  one,  and, 
as  we  have  no  such  institution  permanently  and  leg-ally  estab- 
lished in  America  today,  the  prime  essential  of  any  sufficient 
banking  plan  is  the  equipmeyit  of  our  system  in  so??ie  way  or 
other  with  the  facilities  of  a  bankers'  bank. 

We  have  now  touched  upon  the  three  fundamental  desi- 
derata of  our  banking  system.  There  are  of  course  other 
defects  which  affect  one  or  another  kind  of  banking-,  but  these 
are  the  crying  needs  of  universal  importance.  We  need  a 
more  flexible  and  responsive  note  issue.  We  need  more  flex- 
ible requirements  for  reserves.  And  we  need  some  kind  of 
an  organization  or  institution  of  the  nature  of  a  bankers'  bank. 
Others  may  look  at  these  needs  from  somewhat  different 
angles  and  name  them  differently,  but  the  majority  of  what 
might  without  too  much  presumption  be  called  ' '  authorities ' ' 
would  agree  in  substance. 

And  now  in  bare  outline,  how  should  each  of  these  needs 
be  met? 

I.    REMEDIES  FOR  THE  NOTE  ISSUE. 

First.  In  making  the  note  issue  flexible  there  are  at 
least  three  important  questions  to  be  decided.  Upon  what 
shall  future  issues  of  notes  be  based?  Shall  the  bond  secured 
currency  be  retired  ?  And  by  whom  shall  notes  in  the  future 
be  issued  ? 

It  is  generally  admitted  today,  by  all  except  possibly 
by  self-interested  dealers  in  bonds,  that  in  the  future  addi- 

[  26  ] 


tional  issues  of  notes  can  only  be  made  satisfactorily  respon- 
sive to  business  needs,  if  requirements  as  to  the  pledge  of 
bonds  of  whatever  kind  as  collateral,  are  done  away  with, 
and  the  amount  and  security  of  the  notes  are  made  contin- 
gent upon  the  usual  banking-  assets,  cash  and  commercial 
paper. 

Shall  the  Bond  Secured  Currency  Be  Retired? 

Whether  the  security  of  the  amount  of  notes  now  out- 
standing should  be  changed,  depends  upon  whether  the 
values  of  the  United  States  bonds  now  so  used  can  be  other- 
wise taken  care  of.  We  have  some  730  millions  of  two  per 
cent,  bonds  now  marketable  at  par,  almost  all  of  which  are 
used  for  this  purpose  and  which  would  probably  lose  a  quar- 
ter or  a  third  of  their  value  if  the  circulation  privilege  were 
removed  without  other  compensation.  Before  changing 
their  traditional  perquisites  as  collateral,  in  simple  justice  to 
their  owners,  arrangement  should  be  made  to  refund  these 
bonds  into  three  per  cent,  bonds  in  some  such  manner  as  the 
National  Monetary  Commission  proposed. 

Objections  to  Government  Issue. 

One  hears  rumors  from  time  to  time  that  some  member 
of  Congress,  and  it  is  even  hinted  that  a  certain  currency 
expert  in  the  Cabinet,  has  suggested  that  the  government 
hereafter  be  entrusted  with  the  issue  of  all  notes.  We  have 
already  made  two  experiments  in  this  country  with  govern- 
ment paper  money,  and  certainly  no  one  who  is  familiar  with 
their  lamentable  history,  or  with  the  parallel  experiences  of 
most  other  governments  with  paper  money,  would  advocate 
a  renewal  of  such  an  experiment  except  under  the  stress  of 
the  direst  extremities.     Even  if  there  were  not  the  continual 

[  27  ] 


and  precarious  temptation  to  over  issue  in  order  to  defray 
the  expense  of  government  undertaking's,  or  in  order  to 
stimulate  trade,  which  is  likely  to  beset  any  government  that 
is  launched  upon  the  boundless  sea  of  greenbackism,  the 
proposal  would  still  be  objectionable  because  no  government 
is  in  a  position  to  guage  the  needs  of  legitimate  trade  or  has 
any  but  arbitary  means  for  adjusting  the  issue  of  notes 
thereto.  In  this  country  we  are  already  freighted  as  no 
other  important  country  is  with  government  notes,  and  they 
have  left  in  their  wake  a  trail  of  trouble.  Of  one  thing 
therefore  we  may  be  certain.  The  issue  of  any  additional 
notes,  and  above  all  an  issue  which  is  intended  to  be  flexible 
in  amount  and  responsive  to  business,  ought  not  to  be 
relegated  to  the  cumbrous  inexpert  and  ill  adapted  instrumen- 
talities of  the  government. 

Objections  to  Asset  Currency. 

A  few  years  ago  when  the  sole  watchword  of  currency 
reformers  was  "  asset  currency,"  it  was  often  proposed  to 
allow  any  of  our  thousands  and  thousands  of  note  issuing 
banks  to  issue  notes  upon  the  security  of  their  general  assets 
without  special  restrictions  except  possibly  the  necessity  of 
reserving  a  small  proportional  redemption  fund.  The  notes, 
it  was  said,  could  not  be  overissued  if  they  were  only  issued 
in  exchange  for  commercial  paper  arising  out  of  actual  trans- 
actions. "Any  amount  of  notes  may  be  issued,"  wrote  one 
distinguished  expert  whose  name  is  almost  a  household  word 
among  currency  theorists,  "  so  long  as  the  claims  held  by 
the  banks  are  based  upon  actual  and  salable  property."  No 
greenback  theory  was  ever  more  fallacious  or  more  danger- 
ous than  this.  It  was  a  revival  of  the  old  fallacy  of  John 
Law,  of  the  land  banks,  of  the  as  signals ,  and  of  the  directors  of 

[28] 


the  Bank  of  Eng^land  at  the  time  of  the  Bullion  Report.  (It 
would  have  been  well  indeed  if  the  currency  reformers  ot 
a  half  dozen  years  ag-o  had  read  and  pondered  over  that  last 
named  sterling:  document  of  the  year  1810.)  For  if  our  7400 
or  more  national  banks  were  to  issue  notes  with  no  other 
limitation  than  the  requirement  that  they  be  issued  only  in 
exchange  for  paper  arising  out  of  the  sale  of  gfoods,  or  paper 
secured  by  the  pledge  of  goods  or  other  property,  there 
would  be  practically  no  limit  to  the  amount  of  notes  that 
might  be  issued  except  the  consequent  bankruptcy  of  the 
country.  The  ensuing"  rise  in  prices  and  adverse  balance  of 
trade  would  instigate  a  demand  for  gold  for  export  which 
might  easily  sweep  every  remnant  of  specie  from  the  bank 
reserves. 

Most  of  the  plans  for  * '  asset  currency  "  to  be  issued  by 
individual  banks  that  were  widely  exploited  a  few  years  ago 
were  fraught  with  this  most  serious  danger  of  extravagant 
inflation.  If  we  are  to  have  a  currency  based  upon  commer- 
cial paper  and  ordinary  banking  assets,  which  everyone  is 
agreed  that  we  require,  then  the  determination  of  its  expan- 
sion and  contraction  must  not  be  left  without  check  or  hind- 
rance to  seven  thousand  or  more  independent  institutions. 
Its  control  must  be  entrusted  in  one  way  or  another  to  the 
judgment  of  the  most  expert  and  the  most  disinterested 
board  or  committee  that  the  country  can  provide,  and  this 
board  can  best  gruage  the  credit  requirements  of  the  country 
or  of  its  section  of  the  country,  if  it  controls  the  agency  through 
which  the  banks  rediscount  their  commercial  paper,  and  it 
can  best  adjust  the  issue  to  these  requirements  if  it  can 
influence  or  control  the  general  rate  of  discount  in  the  country 
as  do  bankers*  banks  elsewhere. 

[  29] 


Note  Issues  in  Other  Countries. 

It  is  worth  noting-  in  this  regard  that  judged  by  their 
practice  other  leading  countries  do  not  regard  the  issue  of 
paper  currency  as  a  proper  function  either  of  the  g-ovemment 
or  of  ordinary  individual  banks.  In  England  and  France 
and  in  Germany,  with  a  slight  exception  which  has  an  histor- 
ical origin,  the  government  issues  no  paper  currency  what- 
ever ;  and  in  these  same  countries  and  in  many  others  which 
might  be  mentioned  (for  instance,  Italy,  Switzerland,  Sweden 
and  Japan)  during-  the  last  half  century  or  so,  the  privilege 
of  note  issue  has  been  taken  out  of  the  hands  of  individual 
banks,  in  which  it  was  formerly  located,  and  entrusted  to  a 
bankers'  bank. 

Answering  then  the  questions  regarding  bank  notes  which 
we  posed  a  moment  ago,  I  should  say  that  future  issues  of 
notes  ought  to  be  freed  from  the  requirement  of  bond  collat- 
eral, that  the  bond  security  of  the  present  issue  should  how- 
ever only  be  abandoned  when  the  two  per  cent,  bonds  have 
been  refunded  into  three  per  cents.,  and  that  future  issues  of 
notes  ought  certainly  not  to  be  made  by  the  government,  nor 
by  the  individual  banks,  but  can  be  most  soundly  and  scien- 
tifically issued  by  some  superior  banking  agency  which  can 
gfuage  and  regrulate  their  amount  through  the  process  of 
rediscount  and  the  control  of  the  discount  rate. 

II.    REMEDIES  FOR  RIGID  RESERVE 
REQUIREMENTS. 

Second.  As  to  ways  and  means  for  making-  the  reserve 
requirements  more  flexible  there  has  been  curiously  little 
discussion.  It  has  usually  been  regarded  as  necessary  for 
the  law  in  this  country  to  prescribe  more  specific  standards 
for  bank  reserves  and  for  bank  administration  generally  than 

[30] 


are  required  elsewhere,  for  the  reason  that  we  have  so  vastly- 
greater  a  number  of  independent  institutions .  It  is  not  per- 
haps realized  that  we  have  more  than  a  hundred  times  as 
many  separate  incorporated  banks  as  there  are  in  all  Great 
Britain,  and  more  than  fifty  times  as  many  as  there  are  in 
Germany.  Mutual  comparison  and  supervision  are  therefor 
much  less  possible  here  and  the  opportunities  for  lax  or 
inefficient  management  are  correspondingly  increased.  On 
these  accounts  there  is  every  reason  for  reluctance  to  take 
any  step  which  would  seem  to  remove  the  reserve  regulations 
and  give  the  banks  a  freedom  that  some  of  them  might  abuse. 
Yet  everyone  recognizes  that  the  law  is  hopelessly  inept  in 
consigning  bank  reserv^es  to  eternal  idleness  and  unavaila- 
bility. Here  is  the  dilemma  —  to  make  the  reserves  usable 
and  still  to  require  their  maintenance.  It  has  sometimes 
been  suggested  that  the  law  might  allow  the  banks  to 
use  their  normally  required  reserve  upon  payment  of  a 
tax  or  fine  proportioned  either  to  the  extent  of  the  reserve 
deficiency  or  its  duration,  but  this  proposal,  though  sound 
in  theory,  would  be  difficult  of  enforcement  in  practice 
because  of  our  more  than  7400  separate  national  institutions  * 
I  know  of  no  more  satisfactory  solution  of  this  diffi- 
cult problem  of  making  the  reserve  requirements  pliant 
without  seriously  relinquishing  them,  than  that  suggested 
by  the  National  Monetary  Commission  which  proposed 
to  leave  substantially  intact  the  present  reserve  require- 
ments for  national  banks,  but  to  permit  the  banks  to 
count ' '  as  reserv^e  their  balances  with  a  * '  reserve  associa- 
tion ' ' ,  which  was  the  Commission's  name  for  a  bankers'  bank. 
This  would  make  it  still  obligatory  for  every  bank  to  keep  at 
all  times  uninvested  and  available  the  same  proportion  of 
deposits  as  is  required  at  present,  but  it  would  also  make  it 

[  31  ] 


possible,  when  occasion  demanded,  for  it  to  increase  its 
reserves  by  transferring:  some  of  its  commercial  paper  to  the 
reserve  association,  and  receiving*  in  exchang:e  therefor,  upon 
payment  of  the  discount  rate,  an  increased  balance  upon  the 
reserve  association's  books.  Some  such  arrangement  is 
already  open  to  the  banks  of  every  other  country  today 
and  it  makes  their  reserves  indefinitely  more  flexible  and 
responsive  than  ours.  Banks  are  thus  enabled  at  any  time 
within  reasonable  limits  to  transform  any  solvent  assets  into 
available  reserve  funds. 

III.    OUR  PARAMOUNT  NEED  -  A  BANKERS' 

BANK. 

Third.  This  brings  us  back  again  to  the  same  inevitable 
point  toward  which  all  roads  of  currency  discussion  converge, 
to  the  necessity  of  establishing  in  this  country  an  institution 
of  the  nature  of  a  bankers'  bank.  From  whatever  direction 
we  survey  the  subject  this  impressive  fact  looms  over  and 
dominates  the  field. 

If  you  review  our  economic  history  for  the  last  sixty 
years  you  will  find  business  in  this  country  ever  groping, 
often  blindly  but  sometimes  almost  with  frenzy  toward  this 
goal.  In  every  period  of  unusual  strain,  when  our  banking- 
and  currency  system  has  been  on  the  verg-e  of  rupture,  if  not 
actually  collapsed,  you  will  find  a  great  variety  of  temporary 
bankers'  banks  being:  hastily  improvised  in  all  of  our  large 
cities  and  even  in  many  of  the  smaller  towns  to  perform 
tardily,  locally,  ineffectively  and  generally  illegally  the 
functions  which  ought  to  be  promptly  and  effectively  exe- 
cuted by  permanently  and  legally  established  national  insti- 
tutions. You  will  find  committees  of  the  established  clearing: 
house  associations,  and  where   such  institutions  have   not 

[  32  ] 


already  existed,  of  associations  of  bankers  orgfanized  over- 
night, pooling  part  of  the  reserves  of  the  banks  so  that  they 
will  be  available  for  each  other,  making-  loans  on  collateral, 
rediscounting  commercial  paper,  issuing  currency  and  ledger 
balances  therefor,  and  performing  every  function  appropriate 
to  a  bankers'  bank. 

But  you  will  also  find  unfortunately  that  these  ingeniously 
contrived  makeshifts  have  seldom  been  able  to  get  under  way 
in  time  to  forestall  prostration.  The  banking  and  currency 
system  has  usually  already  broken  down ;  and  the  banks  in 
general  have  already  suspended  payment ;  and  all  that  the 
temporary  bankers'  banks  have  been  able  to  accomplish  was 
the  slow  rehabilitation  of  the  great  structure  of  credit,  which 
if  our  banking  system  had  been  scientifically  constructed, 
would  never  have  collapsed. 

Unfortunately  too  these  temporary  bankers'  banks,  hav- 
ing been  organized  without  any  legal  status,  have  been  obliged 
to  exercise  powers,  not  only  which  they  were  not  authorized 
by  law  to  exercise,  but  from  the  exercise  of  which  they  were 
distinctly  prohibited  by  the  law.  It  has  only  been  through 
the  tolerance  of  broad-minded  comptrollers  of  the  currency 
and  state  bank  supervisors,  who,  in  recognition  of  the  great 
extremities  have  practically  suspended  the  execution  of  the 
law,  that  these  temporary  bankers'  banks,  acting  like  Red 
Cross  agencies  of  relief  in  overwhelming  emergencies,  have 
been  allowed  to  proceed  without  hindrance.  The  participat- 
ing banks  in  most  cases  however  have  made  themselves  liable 
to  injunction,  withdrawal  of  charter,  receivership  and  prose- 
cution. 

But  most  important  and  unfortunate  of  all,  with  all  of 
the  ingenuity  and  energy  with  which  American  business  is 
endowed,  it  has  never  been  possible  even  in  the  most  desper- 

[33  ] 


ate  panics  through  which  we  have  passed,  to  organize  a  tem- 
porary bankers*  bank  covering  more  than  a  single  locality. 
No  one  seems  ever  to  have  even  attempted  to  organize  such  a 
temporary  bankers'  bank  upon  a  national,  or  even  a  sectional 
or  ' '  regional ' '  scale.  No  means  have  ever  been  provided,  or 
probably  ever  could  have  been  temporarily  provided,  for 
making  the  reserves  of  different  cities  available  for  each 
other.  Yet  the  most  serious  feature  of  every  American  finan- 
cial panic  has  been  the  jealous  and  disgraceful  struggle  of 
different  localities  to  fortify  themselves  at  the  expense  of  each 
other,  the  sauve  qui  pent,  which  in  periods  of  strain,  or  antici- 
pated strain,  has  led  the  banks  of  each  town  and  city  to  build 
up  their  reserves  at  the  expense  of  their  neighbors,  and  had 
led  each  region  to  protect  itself  at  the  expense  of  other 
regions.  It  is  this  internecine  slaughter  which  more  than 
anything  else  has  caused  from  time  to  time  the  complete 
stoppage  of  domestic  exchange  and  the  general  suspension  of 
payments  throughout  the  country,  and  this  is  the  aspect  of 
the  situation  which  more  than  any  other  requires  remedy. 

Our  temporary  illegal  local  improvisations  of  bankers' 
banks  have  proved  insufficient  because  they  were  temporary, 
illegal  and  local.  History  as  well  as  science,  practice  as  well 
as  theory  all  agree  in  this.  They  agree  also  as  to  what  this 
country  needs.  Shall  the  hand  of  some  unknown  and  not 
overinstructed  politician  that  on  a  hot  June  night  hastily 
penned  a  clause  in  a  political  platform  prevent  our  achieving 
it  ?  Let  us  believe  enough  in  the  ultimate  power  of  truth  to 
hope  not. 


[  34] 


THIS  BOOK  IS  DUE  ON  THE  IM,. 

STAMPED  BEWW^^°^™ 

AN  INITIAL  FlNp'nv.  „. 

WILL  BE  Assr^Il.  ^  °^  25  CENTQ 


l-lOOw-7,'33 


